Originally published in the September 21 edition of World Tax Daily (Copyrights Tax Analysts)
Following waning support for a previous proposal, the Brazilian government has formulated a new way to tax savings accounts and is pushing to have the new tax approved by the end of the year.
Under the proposal announced by Finance Minister Guido Mantega in May, the tax would be progressive and would depend on the level of Brazil’s official interest rate (SELIC) — the rate was 10.25 percent per annum (p.a.) in May and is now at 8.75 percent p.a. The tax would not apply to savings account interest if the SELIC stays at or above 10.5 percent p.a. As the SELIC rate is reduced, the progressive tax would start at 20 percent and increase to a maximum of 100 percent if the SELIC fell below 7.25 percent p.a. The tax base would be a percentage of the 0.5 percent mandatory monthly interest applicable to savings accounts.
The new proposal completely changes the way savings accounts would be taxed. The one similarity to the original proposal is the exempt bracket of BRL 50,000. Interest earned in savings accounts with balances below BRL 50,000 would not be taxed. Interest earned in savings accounts with balances greater than BRL 50,000 would be taxed only on the portion of interest related to the balance exceeding BRL 50,000. In other words, there would be a general tax exemption for interest earned over the first BRL 50,000 in any savings account held in Brazil.
According to Dyogo Oliveira, deputy secretary of economic policy of Brazil’s Finance Ministry, the government abandoned the original proposal because tax calculation would have been very complex and enforcement would have been difficult. The new proposal is simpler, easier to monitor, and does not depend on the SELIC interest rate.
The tax rate would be 22.5 percent, equal to the maximum tax rate applicable to fixed income investments. The tax would be calculated by financial institutions and withheld from interest credited to savings accounts monthly. For example, consider a taxpayer with a savings account with a balance of BRL 70,000 and interest of 0.5 percent credited in a given month.
Without tax, the total amount of interest earned by the taxpayer would be BRL 350 (0.5 percent of BRL 70,000). If the new tax is approved, it would be applied as follows:
- exempt bracket: BRL 50,000 × 0.5 percent = BRL 250;
- taxable bracket: BRL 20,000 × 0.5 percent = BRL 100;
- tax calculation: BRL 100 × 22.5 percent = BRL 22.5; and
- net interest earned: BRL 250 + (BRL 100 – BRL 22.5) = BRL 327.50.
If the taxpayer holds several savings accounts with balances smaller than BRL 50,000, each in different financial institutions but whose total exceeds BRL 50,000, the balances would not be consolidated and no tax would be withheld at the end of each month. But at year-end, the taxpayer would have to consolidate the balances and pay the tax. The Federal Revenue Department will likely create a special form for this purpose.
The government is hurrying to have the proposal approved by Congress in 2009. A law project will likely be sent to Congress within the next few days to allow the tax to be applied as of January 1, 2010. Opposition parties say they are against the new tax and will do whatever they can to block it, especially in the Senate, where the government does not have guaranteed majority support. A media campaign against the project is also being considered, especially given that all House seats and two-thirds of Brazil’s Senate seats will be up for vote in the 2010 general election.
David Roberto R. Soares da Silva